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Japanese government bonds close mostly higher

Friday, January 11, 2008

TOKYO (Thomson Financial) - Japanese government bond prices closed mostly higher Friday after investors shifted to the safety of bonds as stocks extended their losses to finish at a 26-month low.

Initially, bonds fell, tracking losses in the US Treasury market after Federal Reserve chairman Ben Bernanke said the central bank is ready to lower interest rates again to ward off a recession. Stocks in the US rose on Bernanke's remarks and on a report that Bank of America is close to buying struggling mortgage lender Countrywide Financial Corp.

But bond prices recovered as Japanese shares fell sharply, with the key Nikkei index closing at 14,110.79, its lowest level since November 2005.

Bonds were also supported by expectations of further rate cuts by the Fed, because lower US interest rates would make it more difficult for the Bank of Japan to raise its own key rate.

"The bond market has increased its expectation for a 50-basis-point rate cut by the Fed this month to 90 percent" since Bernanke's speech, said Kazuya Ito, fund manager at Daiwa SB Investments.

The Fed is scheduled to hold its next rate-setting meeting on Jan 29-30. The market consensus is for more rate cuts, bringing the fed funds target rate to 3.5 percent this year from the current 4.25 percent, said Ito.

But some market participants are expecting an even more aggressive approach to bring the rate down to the 2 percent level, he said.

With the Fed expected to cut rates further this year, the Bank of Japan will face increasing difficulty in raising its own key rate. The central bank is now expected to leave its key rate at 0.5 percent at least for this year.

The Bank of Japan may even lower rates, according to emerging speculation. But there will be no need to lower rates unless data show a continuing deterioration in the Japanese economy or the Nikkei falls below the 13,000-point level, said Yuuki Sakurai, general manager at Fukoku Mutual Life Insurance.

The yield on the benchmark 10-year bond closed at 1.420 percent, down from 1.435 percent at the close Thursday.

The yield on the 2-year note fell to 0.605 percent from 0.635 percent and the yield on the 5-year note slipped to 0.880 percent from 0.915 percent.

The yield on the 20-year bond declined to 2.075 percent from 2.085 percent. There were no successful transactions in the 30-year bond.

Bond prices move inversely to yields.

The price of the March futures contract for the 10-year bond rose to 138.01 yen from 137.76 yen late Thursday.

Japanese financial markets will be closed Monday for a public holiday.

(1 US dollar = 109.56 yen)

Posted by MOHAMED SAID at 12:29 AM  


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